Knight Asia Newsletter July 2025
Asian equity markets rallied in July on actual and anticipated US tariff agreements, with the MSCI AC ASEAN Index +1.9% (YTD +5.4%), the Hang Seng Index +2.9% (YTD +23.5%), the MSCI Asia Ex Japan +2.3% (YTD +15.7%), and the Thai SET Index (USD) +12.9% (YTD -4.4%).
The month saw many US “trade deals” done ranging from 10% for Singapore, 15% for Japan, EU & Africa, and 19/20% for most of ASEAN, and 39% for the poor Swiss. Negotiations between the US & China are ongoing, apparently making excellent progress, although we expect the August 12th deadline to be extended. Despite the theoretical certainty of these results, actually there are many industry level carve outs both positive and negative. Indeed almost 33% of emerging markets exports to the US are exempted. Pharma seems to be a particular bug-bear, putting Canada & Switzerland in Trump’s sights, and adding direct pharma tariffs of 150-250%. Somehow this is supposed to reduce drug prices in the US. Similarly, 100% tariffs are to be imposed on imported computer chips, except from companies making US investment commitments.
In the effort to balance trade, many countries have agreed to buy large amounts of US weapons, although this only works for US “allies”; other balancing items are energy products and aeroplanes. Perhaps the most uncertain aspect of Trump’s tariffs are the non-trade related penalties such as those imposed on Brazil for the Bolsonaro prosecutions. India refused to play ball regarding cutting oil & gas imports from Russia, and was hit with a 25%+25% tariff, (Apple is theoretically exempted after promising to invest an additional US$ 100 billion in the US). However, the additional 25% tariff on Indian imports may be short-lived if next week’s summit between President Trump & Putin leads to a ceasefire in Ukraine. Despite this and many other real or alleged peacemaking efforts, Trump may be disappointed in his bid for the Nobel Peace Prize for one obvious reason.
The side effects of the new tariffs are legion. On the positive side for the US economy are the huge new investment pledges for the US, and reshoring of manufacturing. On the negative, tariff costs will be primarily passed on to US consumers thereby depressing demand; another is the large scale increase in US weapons exports, will they make the world safer or not ? And gas sales may set back the development of sustainable energy in recipient countries. However, the biggest effect (which few people talk about) is the fact that the US trade deficit funds half the US federal budget deficit. If successful, President Trump will need to find at least US$ 1.2 trillion per annum from elsewhere. Meanwhile, emerging markets continue to diversify trade away from US trade dependency, and may have also begun reducing involvement in US capital markets, which will risk a yawning federal funding gap.
Although the US$ rebound slightly in July, the repatriation of Asian wealth appears to be continuing, into better value equities & lower risk bonds at home, compared to those in the US. This is leading to rising stockmarkets and local liquidity in most Asian markets. In Thailand’s case foreign inflows were approximately US$ 500 million in July, although net outflows for the year still almost US$ 2 billion. Chinese money continued to flow back to Hong Kong, ironically putting the HK$ peg is under pressure, as investors arbitrage the interest rate gap: borrowing HK$ at 1% and depositing in US$ at 4%. This outflow of Asian money from the US may be a harbinger of a potential US government debt funding crisis in the next 12-18 months. Foreign investors own US$ 8.5 trillion of the US government’s $28 trillion in debt, climbing +$2 trillion new deficit per annum. As foreigners shy away from new purchases and rollovers, US interest rates will need to rise (after a temporary cut late this year) to attract buyers, and trigger a large market correction. This may then be followed by another round of QE to prop things back up.
An Asia, the totally expected good news was that Thailand & Cambodia agreed quickly to a ceasefire in their border conflict, under PM Anwar’s masterful mediation. This followed PM Paetongtarn’s suspension from her PM office for her handling of the Thai/Cambodia border dispute, by the all powerful Thai Constitutional Court. Coincidentally the previous major border conflict of 2008, centered on the Preah Vihear temple complex, also occurred under the Thaksin backed government of Samak Sundaravej. For unrelated reasons, the conflict wound down after Samak was removed by the Court for appearing on a cooking show, and People Power Party was dissolved, and defecting PPP MPs joined Abhisit’s “Democrat Party” coalition.
Politically, Pheu Thai has now been largely discredited by a rather confused public perception that somehow this all happened because of a falling out between former PMs Thaksin & Hun Sen. PT popularity has taken a huge hit, and it appears that another election is coming soon in Thailand, possibly after an interim [Gen Prayut] premiership first. However, the election could spring a surprise, if a massive protest vote in favour of newly minted People Party (previously Future Forward then Move Forward), gave it an overall majority in Parliament and the ability to form a government. Such a PP government might not last long, but would be a breath of fresh air to democratic and quazi-democratic countries, and lead to major capital inflows.
I’m visiting Myanmar at the moment, where there is some slight optimism with regards to the upcoming December/January elections. Although most opposition groups may boycott the election, there will at least be a nominally civilian government. If greater autonomy is granted to the seven states, a quazi-federal system might emerge. Senior General Min Aung Hliang has consolidated his position in the military, and provincial territory losses are gradually being reversed. Many countries, in addition to China, seem to be now accepting that his leadership is the de facto reality and renewing engagement. Even the US recently reduced sanctions and is widely rumoured to be seeking heavy rare earth deals sourced from Kachin State. It would be no surprise if Myanmar tariffs soon drop from 40% to 20%, although exports to the US are minimal.
Yangon appears surprisingly prosperous, as it serves as a service centre and magnet for money generated elsewhere in the country, although in the absence of an active capital market, real estate is the primary recipient. Cement prices remain high, generating profits for remaining operators. Localized solar power and equivalent battery storage capacity is being installed across the country to address power shortages and damaged transmission lines.
With Best Regards
JEREMY